Beware of simple staff cost percentages

05 Jan, 2018 - 00:01 0 Views

eBusiness Weekly

There is an obsession in those monitoring Government, local government and private sector accounts with the percentage of costs allocated to staff, with a demand that this percentage be kept to some arbitrary limit so that there is money left over for “service delivery”.

Yet those gripped by this obsession rarely consider just what is the “service” that is supposed to be delivered, and refuse to measure other critical factors, such as the ratio of staff costs devoted to administration, and especially head office administration.

To take an example from the State. The primary service provided by the Ministry of Primary and Secondary Education is to put an appropriately qualified and trained teacher in front of every 30 to 40 children. That service is a pure staff cost.

There are almost as important services to be provided, principally to ensure that every child in front of that teacher has the correct text book for the lesson, some basic stationery, and access to the appropriate equipment. But a set of text books for an entire primary class costs the equivalent of a few months’ salary for a teacher and lasts around eight years. And a year’s supply of exercise books is a few dollars for each child. Admittedly science labs are more expensive to equip, but even so that cost, spread over several years, is dwarfed by the salary of the science graduate in the lab supervising the children.

So in that particular ministry staff costs might well be significantly over 70 percent of the total budget, simply because the main service being delivered is a staff cost. What might well be more important is the ratio of costs devoted to administration, at head office in Ambassador House and the provincial offices, compared to the costs of the teachers. The education ministry probably has the lowest such ratio of any Government ministry, simply because there are so many teachers, but its efficiency can perhaps be measured by that ratio.

The Health Ministry will also be labour intensive. Health services basically mean having a nurse or doctor available for everyone who needs one. But these professionals also need equipment, drugs and other stuff that is not a staff cost.

So although the health budget might have a highish staff cost this will be lower as a percentage than in education. Again the ratio of administration to service provision staff costs could be a good efficiency measure.

In local government, say Harare City Council, the ratio of staff costs must vary. In the City Treasurer’s department the staff costs will be a high proportion of the total costs. Besides having suitable staff the only other serious costs are the database servers, software and workstations, plus the cost of printing and delivering the bills. Yet in say the roads department, staff costs must be a far lower ratio since that department needs to buy stone, clay, bitumen, heavy equipment, fuel and spares.

In the private sector one size will not fit all. A company writing software might well need to devote well over 70 percent of its costs to the salaries of the coding staff. A company making shoes might well find a third of its costs go on production staff and the rest is allocated to leather and other materials plus the complex equipment needed to turn these materials into shoes. Again it depends on just what the company is doing.

Even in journalism, an online news site will obviously spend a higher proportion of its revenue on staff than a printed newspaper that needs to buy a regular supply of newsprint and ink plus spend serious money every now and again on printing presses and imaging equipment. The same ratios cannot be used for both.

Even in the private sector we need to measure the ratios between administration costs and production costs. A high percentage spent on administration should ring warning bells.

What we are trying to get across is that there is no “one size fits all”. What is needed in every unit of the public and private sectors is a careful analysis of what percentage of revenue or costs should be allocated to administration, human skills (the production staff cost as it were), materials, equipment, and the like.

Where human skills are ever more central, then staff costs will rise, the ultimate perhaps being in an economic management consultancy, the sort of place where an economist pontificates about the need to keep staff costs cost low so there is money for “services”. In that one person business staff costs might well be 90 percent plus of the bill, since all that is being sold is the time and skill of the analysts and all they really need is a laptop.

So while we would agree that staff costs do absorb too high a percentage at present of the Government’s budget, and that this is possibly the same in many parts of the private sector, we also appeal for a more sophisticated approach to finding the optimum ratio for each type of unit and work, rather than applying a single flat ratio.

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